News that President Trump would delay any decision on joining Israel’s attacks against Iran has boosted the market mood at the end of this week. Stock futures are higher and the oil price is tumbling, gold is down $25 per ounce. Brent crude has dropped by $2.30 per barrel so far, as traders price out the worst case scenario for geopolitics.
The risk is that Trump changes his mind. However, like reciprocal tariffs, Trump sets movable deadlines. While the oil price is likely to maintain some geopolitical premium, Brent crude could move back below $75 per barrel, after touching $79 per barrel on Thursday, as fears of a major escalation in the conflict ease. The oil majors, including Shell and BP, could come under pressure today, after both rose by more than 1% on Thursday. This could act as a drag on the FTSE 100, which has been an outperformer so far this week as it benefits from elevated crude prices.
UK economic data: the BOE is right to worry about growth
In the UK, retail sales and public sector finance data was released for May. The news was mixed on the public finances. Although tax receipts were up on higher income tax revenue and national insurance contributions, government spending was also higher due to increased running costs and inflation linked increase in benefits. Public sector borrowing may have come in less than expected, at £17.7bn vs £18bn expected, however, this was more than £0.7bn compared to May 2024, and it was the second highest May borrowing level on record. The only higher level of borrowing in May was in the middle of Covid in 2020.
This morning’s public sector finance data is unlikely to ease pressure on Rachel Reeves, as elevated borrowing levels have been a major feature of her time as Chancellor, eroding her message that she is putting the country on a firmer financial footing.
Why higher taxes are not denting the public debt
While higher taxes might be tempting, the issue is the benefits bill, as the ONS makes clear today. Higher tax receipts are not enough to cancel out the ever-growing benefits splurge in the UK. The problem for the UK is that we are in a never-ending spiral: public sector borrowing continues to rise, which pushes up bond yields and the costs of borrowing, which pushes up public sector borrowing. This cycle is not sustainable, and bond vigilantes could be woken from their slumber by more data like this.
Retail sales have worst month of the year in May
Accompanying the public sector finance data was retail sales for May. Sales plunged by more than expected, excluding autos, retail sales fell 2.8% last month. The annual rate is now down 1.3% YoY. Ironically, consumer confidence for June was higher than expected at -18 vs. -20 expected. This is the highest level of the year so far, at the same time as retail sales plunged into negative territory for the first time this year. The decline in sales was led by a plunge in the sales of household goods and food sales, which were lower by 5%. Clothing sales also fell, although it will be interesting to see if the recent hot weather has led to a surge in sales for June.
The market reaction
The market reaction to this data is mixed. On the one hand, weaker retail sales support loser monetary policy, which could weigh on bond yields and on the pound. On Thursday, the BOE suggested that they are sensitive to signs that the economy is coming under strain. For example, a softer jobs market may be one reason why retail sales fell so much last month. If people are worried about their jobs, then they might scale back spending. However, balancing this is the elevated public debt levels, which weighs on bonds and pushes up yields. If UK yields underperform European yields, then it is a sign that bond traders are wary of the UK’s debt levels, which could be a big problem for the chancellor down the line.
UK yields have been stable in the UK in the past month, and the 10-year Gilt has outperformed its European and US counterparts. However, this leaves UK Gilts vulnerable to selling at attractive prices, which is something we will watch closely in the coming days.
The pound has given back some gains this morning, and GBP/USD is currently trading below $1.35. A mixture of weak growth and higher borrowing is not a recipe for success for a currency, so we could see further pound weakness later today. EUR/GBP is rising today and is testing 0.8450. This pair is close to the highest level since April, and there could be further gains to come if the pound loses value as we expect.
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